FOMC minutes show Fed taking cautious approach

NEW YORK — Although deterioration in financial conditions earlier this year proved temporary, several participants in a recent Federal Open Market Committee meeting saw the underlying factors as unresolved and thus posing ongoing downside risks, RBC Economics reported.

Policy asymmetry was mentioned several times, with participants generally preferring a cautious approach given the limited ability for conventional policy to respond to downside risks or persistently low inflation, said Josh Nye, an RBC economist.

The meeting minutes showed the cautious approach to policy tightening that Chair Janet Yellen has espoused recently is favored by several committee members, he explained.

“The Fed is increasingly sensitive to ongoing risks from financial and international developments and seems willing to tolerate a modest overshoot of its inflation objective, as policy is better positioned to respond to upside rather than downside risks,” said Nye.

“As such, we expect the Fed funds rate will be held steady in the near term with further tightening likely to be delayed until later this year,” he added.

A majority of committee members seemed to be in Yellen’s camp as many participants expressed a view that the global economic and financial situation still posed appreciable downside risks to the domestic economic outlook. Many saw these risks, and an asymmetric ability for the Fed to respond given the low fed funds rate, as warranting caution in adjusting monetary policy, Nye noted.

As for how the domestic outlook is being affected, it was noted that the U.S. economy has been resilient to recent global economic and financial developments.

Most participants, however, see foreign growth as likely to be somewhat slower than previously expected, which would tend to weigh on U.S. aggregate demand—a sentiment that Yellen has echoed in recent remarks.

Highlighting the Fed’s increasingly international focus, it was noted that the relevant data include not only domestic economic releases, but also information about developments abroad and changes in financial conditions that bear on the economic outlook.

“Committee members were split on whether or not the economy has reached full employment, as well as whether the recent increase in inflation will be sustained,” said Nye.

Regarding the latter, several participants see global disinflationary pressures and falling inflation expectations as posing downside risks to the inflation outlook.

“Again highlighting policy asymmetry, it was noted that it would be easier to raise rates quickly if the economy was overheating or inflation was increasing rapidly, than it would be to ease policy if the growth or inflation fell short of expectations,” Nye explained.